So, the market just loves Starbucks (SBUX) and hates Green Mountain Coffee Roasters (GMCR) now. Starbucks announced on March 8, that it would enter the single serving coffee machine business, which Green Mountain currently dominates. This sent GMCR shares plunging by as much as 20% after hours, while SBUX soared past $50 per share.
There have been a few articles on why GMCR is still not a good buy after the plunge. This contrarian article presents a few points on why not all is lost for GMCR and its shareholders, fully acknowledging the company has its fair share of bad news as well.
Valuation: Can you believe GMCR is trading at a lower valuation than Starbucks? It wasn't long ago that GMCR was trading at lofty valuations like Netflix (NFLX) and Amazon (AMZN) were. GMCR now trades at 27 times earnings while SBUX trades at 31 times. Yes, Starbucks is expected to grow at a faster rate but looking at the PE, the growth is almost priced in.
Price Targets: Taken with a pinch of salt, analyst estimates broadly give an idea of where the stock is expected to head in the next 12 months. Starbucks's price target of $54 is not too far away, while GMCR's $88 is a good 70% away. (There maybe a few upgrades/downgrades coming along next week.)
History: Let's face it; GMCR is a trader's stock going by recent history. In November 2011 the stock tanked close to 40% one day, before rebounding in a matter of few days. So, those with quick hands can make a ton of money trading it over such sharp drops as the one on Friday, March 9, 2012.
Earnings: GMCR has consistently beaten by the earnings estimate, as can be seen from 3 of the 4 quarters shown below. The EPS has been more or less steady and increased by a good percentage in the December quarter of 2011. At the end of the day, it's the company's earnings growth that matters.
(Click chart to enlarge)
Not a Zero-Sum Game: The way the market reacted to Starbucks's entry into the single-serve business was like GMCR will surrender its total market to Starbucks. The $8 Billion single-serve business is not a zero sum game. GMCR does not need to lose for Starbucks to win.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GMCR over the next 72 hours.
